Thursday, December 05, 2002

Pedro Solbes Wants to Give Flexibility to the Pact

In a new draft paper containing proposals to reform the stability pact, Pedro Solbes wants to reward those countries with sound finances and low debt, by giving them more flexibility to combat economic downturns. Only problem, the good countries are mostly non-Euro ones. To quote the FT: "Those benefiting most from this new flexibility would be Britain, Ireland, the Netherlands, the Nordic countries and most of the EU's 10 candidate countries - mainly from the communist bloc - which have low debts and small pensions liabilities".

Pedro Solbes, EU monetary affairs commissioner, wants to focus more attention on high debt, arguing Europe is failing to prepare for an impending pensions crisis. He hopes his paper on budgetary co-ordination will restore much-needed credibility to the stability pact, which was designed to underpin the euro by imposing fiscal discipline.Mr Solbes will try to answer the charge that the stability pact lacks flexibility by proposing that countries with "high-quality public finances" - including low deficits and low debt - should be able to borrow to fund investment.

The question of what qualifies as "good" investment, boosting growth and justifying short-term deficits, will be controversial. For instance, the Commission welcomes Britain's expenditure on hospitals and schools, while France says it should be able to spend more on research and development. In Germany labour reform is a priority. The Commission will give its view on each state's budget proposals each year, but the final verdict will lie with EU finance ministers.

Those benefiting most from this new flexibility would be Britain, Ireland, the Netherlands, the Nordic countries and most of the EU's 10 candidate countries - mainly from the communist bloc - which have low debts and small pensions liabilities......Belgium and Greece both have debts of over 100 per cent of GDP - far above the 60 per cent limit set at Maastricht - but Italy is by far the biggest problem: its debt is 110 per cent and rising.
Source: Financial Times
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